FCA Reveals Significant Rise in Guarantor Loans

The Financial Conduct Authority has found that
the number of borrowers applying for a guarantor loan as increased
significantly. The Financial Conduct Authority (or FCA) is a UK financial
regulatory body that works independently from the UK Government. According to their
research, the balances on current guarantor loans have increased by more than
double in only the past three years.

Lending is one of the largest industries both
throughout the UK and the world. Estimations for this year (2019) balances have
nearly reached an astounding total of £1 billion. Executive director of supervision
at the Financial Conduct Authority Jonathan Davidson has stated that “over the
last few years we have seen a dramatic increase in the use of guarantor loans
by consumers.”

The Executive Director of Supervision followed
on this, stating that whilst such loans can be useful for those with poor
credit, these findings from recent studies have started to raise concerns. Davidson
explains that “recent work we have done in this area showed that many guarantors
are making at least one payment and the proportion of guarantors making these
payments is growing.”

The typical borrower of such a loan is, as previously mentioned, those with a history of poor credit. These types of loans can be extremely popular with the younger generation who have not yet had the time to build up a good credit history. However, these loan companies get customers from all walks of life, the only thing most of them share in common being their bad credit history.

Alongside this worrying increase, there is also
“anecdotal evidence” that the guarantors of these loans might not have a full
understanding of the responsibilities that come with being a guarantor for such
loans; often shocked by how likely they will be called upon to make payments on
behalf of the loan borrower.

These issues raised around the guarantor have
made the significant rise in such loans a cause for concern. Therefore,
following this considerable rise in guarantor loans, it is of the utmost
importance that both borrowers and their guarantors are made fully aware of what
such loans entail. Making borrowers and guarantors completely aware may lead to
a decrease in the number of borrowers applying for loans they can’t afford,
which could further lead to less guarantors having to pay out for such loans.

FCA are now set on improving certain areas of guarantor
loans for the better, claiming that their work now “will therefore focus on
affordability and on understanding whether potential guarantors have enough
information to understand the likelihood and implications of the guarantee
being enforced.”

This work will be focused on such areas of this
sector as affordability checks. In addition to this, changes will be made to
ensure all guarantors have been sufficiently informed on their responsibilities,
and understand the likelihood that such responsibilities may have to be
enacted. Amendments to regulations surrounding these loans have also been made,
and now cover more areas of the guarantor’s role. Such amendments including
in-depth explanations to both parties (borrowers and their guarantors) before contracts
are signed.

With such implementations to be put in place,
this rise in the number of applications for guarantor loans can be seen as a great
thing. Not only will this mean better business for guarantor loan companies,
but also business without issue – borrowers and guarantors now being made more
fully aware of the responsibilities they face applying for such loans.

With more informative lending and better-informed
borrowers, the guarantor loan industry can now flourish to its optimal level as
a loan provider for those struggling to obtain loans.